Known in Korea as the 외환위기 (foreign exchange crisis), or colloqualliry as the IMF때(IMF time), the Asian Financial Crisis was a period of swift currency depreciation that caused the collapse of financial markets in many countries in East Asia in the late 1990's. This marked an important period in Korea's economic history, in between its emergence as one of the "Four East Asian Dragons" and its contemporary state.
[edit] Causes
Its primary cause was capital flight. This occurs when foreign investors suddenly lose confidence in a country's economy and pull out their assets to invest elsewhere. This floods the exchange markets with the currency, resulting in a swift depreciation. Many Asian countries tried to prop up their currencies by spending their foreign capital reserves; some, including South Korea, nearly bankrupted themselves in the process.
The crisis actually began in Southeast Asia but spread to include every Asian economy with significant foreign investment.
The American economist Paul Krugman theorizes that the collapse of the financial markets was due to the rapid increase in capital investment over the preceding decades without substantial increases in total factor productivity. One of the major English-language books about the episode, The Chastening, blames it on an economic phenomenon called "moral hazard", in which people make extremely risky investments using money they aren't responsible for. Bad investments had been made by foreign and domestic investors, encouraged by the possibility of high returns and a general culture of corruption which quickly became known as "crony capitalism"; often this meant investors had little choice but to invest in ventures driven by nepotism or corruption if they wanted to also invest in sounder enterprises.
However, there are many people who believe the crisis to have been engineered so as to force companies to accept the stringent conditions attached to IMF aid, such as liberalizing their economies, cutting taxes and government spending (especially on the welfare state), and generally making life easier for foreign companies and investors.
[edit] Effects
The economic recession that followed the collapse of the financial crisis caused much unemployment in the short term. Several countries including South Korea spent virtually all of their foreign currency reserves in trying to protect their currencies, which prior to the crisis were not allowed to have their value governed solely by market forces.
After a period of adjustment, policy reform, and anti-corruption drives effecting both Chaebol and government officials often forced by the IMF, some of the economies emerged from the crisis and continued to grow, while others have yet to shake off the economic depression. Today the won is as strong as it was at the beginning of the crisis and South Korea's foreign currency reserves are significantly greater than they had been.
[edit] Effects in Korea
During the crisis, various citizens movements sprang up to help the country pull together and move through to better times.
- 실직자 배식 운동 - Feeding the Unemployed Movement
- Social organizations such as churches set up lines to hand out free food to the unemployed who were struck by the enonomic recession.
- 금모으기 운동 - Gold Collection Movement
- The government encouraged citizens to sell their hard currency, such as gold in exchange for Korean Won. This then allowed the government to purchase foreign currency at discount rates compared to purchasing it with the rapidly depreciating Won.
Many salarymen were fired but didn't tell their families, and continued to get dressed and leave the house in the morning with their briefcases. Most of them spent the day looking for work or commiserating together in parks; a number of them committed suicide when the truth had to come out.
[edit] The Role of the IMF
The International Monetary Fund played a role in stabilizing the financial markets of the region. It set conditions of tighter fiscal and business policies in order to introduce loan packages to bail out the governments affected. The IMF regime is often referred to as "shock therapy" because it is quite severe and involves significant cuts in spending to help the poor. In several countries including South Korea, the IMF had practical control over many economic decisions including tax rates, interest rates set by central banks, etc.
The association of the IMF with this period of hard economic times is so strong that many Koreans refer to this time simply as IMF, and many blame it on the IMF outright or believe it to have part of a plot to force Korea to allow foreign companies to make greater profits.
